Maran's New Deal

This is the ultimate irony. The company that just last year challenged Trai's decision to slash bandwidth tariffs (a major determinant of long-distance tariffs), not once, but twice, on the grounds that it was making just an 8 per cent return on capital employed, which is the lowest among telecom firms, is today making headline news for slashing bandwidth tariffs!

After both VSNL's [ Get Quote ] appeals were struck down, Trai's order to lower ceiling tariffs by 28-75 per cent came into effect in November, and VSNL has now gone and announced a further cut on existing rates by up to 40 per cent.

But why blame VSNL?

While it said it was not making monopoly profits (it had a 60 per cent market share then), its appeal of the Trai order did say that, "it is a well accepted economic principle that existence of super-normal profits in any industry naturally encourages entry of new entrants and consequent competition amongst which normalizes the profits earned" and that "if ever, super normal profits existed in the business, many more competitors would have been encouraged to enter the market."

Well, the competitors are here, and by the dozens. There are 17 firms that have applied for licences to offer domestic long-distance (DLD) services and another seven who've applied for international long-distance (ILD) ones -- in addition, BT has got FIPB approval and will apply soon, and others like Verizon Business, Reach and Orange are reportedly in the process of finalising their applications.

All of this has been made possible by one decision of Telecom Minister Dayanidhi Maran [ Images ]. At a time when Trai was trying to increase the protection given to long-distance players (last year, it decided to keep the entry fee for DLD+ILD at Rs 107 crore (Rs 1.07 billion) in Year 1, going down to Rs 30 lakh -- Rs 3 milion -- in Year 5), Maran publicly spoke of a cartel-like behaviour and ensured the entry fee was reduced to a mere Rs 5 crore (Rs 50 million).

In addition, and perhaps more importantly, the massive rollout obligations (a DLD operator would have to place a telecom node in a host of places in the country) that required a capital expenditure of a few thousand crore (Rs billion) rupees was done away with, the revenue share that went to the government was reduced from 15 per cent to 6 per cent, and FDI limits were raised from 49 per cent to 74 per cent.

While NTP 1999 reduced licence fees by 70-80 per cent in the first few years by moving to a revenue-share regime, long-distance revenue shares have fallen 96 per cent; while NTP resulted in 5-6 players competing in the mobile space, this will see more than 20 people competing in the DLD space and more than 10 in the ILD space, especially the Virtual Private Networks (VPN)!

The impact of this is already being felt. Public sector MTNL [ Get Quote ] was one of the first to take advantage of this, leased a line from BSNL from Delhi [ Images ] to Mumbai [ Images ] and brought down long-distance rates to local ones. In response, Reliance Communications [ Get Quote ] came out with a similar offer of local call rates for calls from about 21 state capitals.

Not only will this intensify once the new DLD and ILD players come in, it is likely there will be a sea change in the quality of service as well, at least in the enterprise/VPN business, which is already around half a billion dollars and is growing furiously, given that a large part of it is the BPO/IT software market.

Unlike the case of mobile phones, where the quality of service has fallen and the small consumer is near-helpless, big companies will now be able to choose between Indian players and global giants who offer end-to-end service, from Infosys' [ Get Quote ] Bangalore campus to FedEx's US headquarters, for instance. Since telecom costs are an important part of any BPO firm's cost structure, and the downtime of a network is what's called mission critical, any improvements here can only increase India's competitiveness.

There are, of course, some major irritants still left that could still upset the party, especially on the ILD front. Unless Trai forces the pace of implementation of the Carrier Access Code, which allows you and I to just dial 002, say, from our Airtel phone to use Reliance's DLD network to call from Mumbai to Delhi, instead of Airtel's, existing operators will still be able to charge higher tariffs since they alone have access to those who want to call long-distance. While a similar issue holds for ILD traffic, the other issue here is that of "remote access".

Today, if a firm like BT has an ILD network across the globe, the major part of its job is to monitor this on a 24x7 basis to ensure there's no fault anywhere, and repair any fault from this access point -- BT can be monitoring this from the Maldives [ Images ], from Hong Kong, anywhere. While most countries including the US, China and Israel allow such remote monitoring, when the FDI limits were increased to 74 per cent, the security agencies managed to get a clause inserted saying remote access would not be allowed.

While affected parties like Nasscom have naturally protested saying that not allowing remote access could increase the down-time of their networks by as much as 40 hours a year, even the department of telecommunications is opposed to the idea, and has already sought two extensions on its implementation.

Given how Maran's colleague has managed to get his way on SEZs despite the finance ministry's disapproval, Maran needs to score a similar win here -- all he needs to do is to take the national security people to the US Homeland Security or the Israeli equivalent, and get them to explain how they still manage to protect national security.